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Risk mood strengthens

12 March 2021

Dovish major central bank. Tick. Passage of another couple of trillion dollars relief plan. Tick. Bond yields lower. Tick. Stocks in the green. Tick! The Dow is starting its fifth straight day of gains with more record highs, while the Nasdaq is in a hurry to reclaim its 50-day moving average.

Tech stocks are leading the way with Tesla now approaching $700 while the EuroStoxx 600 benchmark is within touching distance of its pre-pandemic high reached last February.

ECB to ramp up bond purchases

The main event of the day was the ECB meeting, where President Lagarde and the governing council decided to increase the rate of its pandemic emergency purchase program at a “significantly higher” pace over the next quarter. This speeding up of bond buying is to prevent financing conditions tightening too much which would be inconsistent with countering the downward impact of the pandemic crisis on the projected path of inflation.

The effect of this more dovish than expected measure from the region’s central bank has seen the euro sell off modestly and bond yields also move lower. Remember that Germany’s benchmark bond yield has risen sharply this year and threatened to increase borrowing costs of the region’s companies where the vaccine rollout has been slow and economies are set to take longer to recover than the US.

Technically, EUR/USD is fairly neutral at the moment, with the February lows at 1.1952 proving resistance for a move toward the 1.20 mark and near-term support comes in at 1.1915/20. The single currency is also trying to break its six-day losing streak versus pound sterling and remains in slightly oversold territory on the RSI.

Upstream, downstream, multifaceted, holistic…

President Lagarde still seems to mystify markets sometimes and this press conference was no exception with her explanation of the ECB’s reaction function. Was this the desired clarity that markets were looking for? It is debatable and she admitted herself that market watchers wouldn’t ordinarily hear these words at a central bank press conference!

The bottom line is that the bank will frontload its bond buying to underscore the fact it is looking through higher inflation prints in the months to come.

But the balance of risks is now seen as balanced – which may have more to do with the wide spectrum of views and opinions that make up the governing council.




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